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Determine Whether to Pay in USD or the Local Currency

Sometimes it makes sense for American businesses to pay foreign vendors in greenbacks. However, there are many instances where paying in foreign currencies can save U.S. companies money.

In fact, a Western Union study found that many Chinese exporters prefer to receive payment in the local yuan instead of the U.S. dollar. Yet, these business owners rarely ask their American trade partners to accommodate their international payment preference for fear of hurting their relationship with a trusted importer. The result is $2.4 billion in unnecessary foreign exchange markups for U.S. imports every year.[1]

On average, Chinese exporters add a 3 percent surcharge and pad their prices for paying in U.S. dollars instead of their local currency, says Alfred Nader, vice president of corporate strategy and development in North America for Western Union Business Solutions.

“The reality is that the business owners on the other side of the transaction are very savvy, and understand the currency market and usually take advantage.”

— Victor Hinojosa, director of North American partnerships at Western Union Business Solutions

Before automatically deciding to pay international business partners in U.S. dollars, business owners should take the following factors into consideration.

Vendors' Price Padding

Many American small business owners assume they can mitigate extra costs if they pay in U.S. dollars. However, that's not necessarily the case.

"The reality is that the business owners on the other side of the transaction are very savvy, and understand the currency market and usually take advantage," says Victor Hinojosa, director of North American partnerships at Western Union Business Solutions. That's because business owners in other markets like China know that when they are paid in U.S. dollars, they have to go and convert that money into their local currency.

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American business owners can learn about their vendors' price padding practices by simply asking for initial quotes or invoices in dollars and the foreign currency. "In most cases, it's cheaper to buy the local currency," Hinojosa says. If a business owner compares the difference and decides to pay with the local currency, he or she can use hedging tools such as bids to buy the currency at a preferred rate. Bids allow business owners to stipulate the specific price or price range at which they want to purchase a foreign currency, along with the amount needed. If the preferred rate becomes available, the foreign exchange transaction is executed.

Consider Timing and Efficiency of Payments

Before deciding on which foreign currencies to use, consider the timing of sending and receiving international payments in that specific currency, says Brendan McGrath, CFA, corporate risk manager for Western Union Business Solutions.

Reach out to the institutions that will transfer money overseas and find out how fast the local currency can get there versus U.S. dollars, in addition to how much it will cost. It's also important to factor in potential fees and charges if an international payment fails and is sent back. "Price isn't the only thing - speed and simplicity are worth a lot, too," McGrath says. Using a trusted online foreign exchange service makes it convenient and quick for business owners to transfer money overseas, whether they're on a computer, tablet or any number of mobile devices.

No matter where an international business partner is located, business owners should consider the impact on both sides of the transaction before deciding to pay in U.S. dollars or the local currency. For example, if $1 U.S. dollar equals ¥6.22 Chinese yuan, a U.S. importer would only need to pay $8,050 dollars to purchase ¥50,144 yuan worth of Chinese products. While the strength of the dollar relative to the yuan benefits importers, it makes products more expensive for Chinese importers to purchase U.S. exporters' goods.

To simplify the foreign exchange process, business owners may want to consider using a trusted online foreign exchange provider to transfer money overseas in a foreign currency. Plus, helpful resources such as an email market-rate alert can make it easier to secure the latest foreign exchange rates.

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